Thursday, May 8, 2014

A systematic approach to investing

Wealth Creation is a long unending story which goes on to decades. The investors should carefully select the asset class i.e. Equity, Debt, Commodities etc. Historically, the data suggests that equity has returned better than any other asset class. Nevertheless, most of the retail investors don't have the expertise in selecting the right stocks and end up in making random investments.

Systematic approach does wonders.

First of all one should be able to come to an asset allocation plan based on his or her risk appetite, investment period, age, liquidity needs, quantum and few other personalised parameters.

SIP

No doubt Systematic Investment Plan (SIP) does wonders in creating assets especially for retail investors who can't commit large funds at a time and don't have expertise in finance domain. Till now, SIP is concentrated on Mutual Funds as Fund Managers offer to sell them units on a regular basis which also helps in taming the market volatility. At any point of time, investment in Mutual Fund works better than Direct Stock investment as the former helps in diversifying the risks and you get an opportunity to own small part of different shares across a large domain.

SIP in Equity

Now, the market is buzz with an SIP in Equity. A person confident with stock selection for a longer horizon can bring the discipline for investment in shares. The question arises ' do you buy more of your favourite stocks when the market nosedived or do you sell your equity holdings before the market plunged? It is very difficult to predict the market; so a systematic approach would be to invest in small amounts through SIPs.

How to go with it?

Similar to SIP in Mutual Funds, the investors also commit small amount every month/fortnight/week. Investors can also commit the fixed number of shares every month. So, on the trigger date, the broker would buy the number of stocks out of your committed amount every month or buys the fixed number of shares of said company. Generally, the minimum commitment amount is Rs 5,000 per month.

Which is better ' Fixed Amount or Fixed Number of Shares?

Let us suppose, you are interested in buying a stock A at the current market price of Rs. 950. Either you can commit Rs 5,000 each month where the broker would buy the shares at the prevailing market price on the predefined investment date else you can also ask your broker to buy five shares each month. The latter option won't help much in getting benefit from low stock prices. If the price of stock comes down, you won't be able to get benefit of low stock prices. However, in the former option, the benefit of average cost averaging plays which helps in buying more number of shares when the stock tumbles.

Is it good ' SIP in Shares?

If you are comfortable in picking good stocks, it can do wonders in creating wealth for you. Direct investment requires active investment approach and you need to keep a tab of flow of news including company performance; hence, SIP in shares should not be done blindly on a predefined date without tracking it. However, if one chooses good stocks initially, say the market bellwethers in their domain and has good long-term growth potential, it can outperform the Nifty basket.

Costs involved

Buying shares at any point of time involves paying transaction costs which goes in the range of 0.5% to 1% depending upon the volume. Apart from this, you also pay Account Maintenance Charges (AMC) which ranges from Rs. 300 to Rs. 1,000. So, depending upon the investment amount, these costs can be averaged out. If one commits high investment amount every month, the initial transaction costs plus the AMC can be averaged out over a period of time.

Good to go with it

There is an appetite for equity investments in India. SIP empowers the investors to build portfolio over a longer period of time. The disciplined approach in SIP eliminates the risk of timing of market. So a systematic approach of investing in highest yielding asset i.e. Equity can do wonders in building assets for your future.

Happy Investing!

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